If you think filing your tax return is a headache, you have nothing on American pilots living abroad, according to a recent CNN Money article.
“As they crisscross the globe, IRS rules require expat American pilots to record exactly how long they’re flying over the U.S., foreign countries and international waters. Once they land, the pilots have to track exactly when they’re working, and when they’re off the clock,” wrote Sophia Yan of CNN Money.
The reason for this is “if they are subject to an IRS audit, the pilots will have to prove how much money they earned in “each jurisdiction, on land or in the air. For this small slice of the American population, following the IRS rules to the letter means a tax headache that lasts 365 days a year,” wrote Yan.
In the interview with a Hong Kong-based airline pilot, “who asked to remain anonymous over fears he would lose his job.” Yan discussed the ridiculousness of the job with him. “On every flight, I have to log the time I’m over foreign countries, and the time I’m over international waters and the U.S,” he told Yan.
These rules don’t just apply to pilots. Anyone who works abroad on a plane or a ship may be required to show their travel records if necessary.
The U.S. is one of the few counties that mandates citizens living abroad to file and pay taxes each year, with the exception of the first $97,600 earned in a foreign country due to certain IRS tax exemptions.
“But here’s the catch — the U.S. government says money made working in or over international waters doesn’t count as foreign income. Take the example of an American expat pilot who flies a 13-hour direct route from Hong Kong to Los Angeles. Money made during the three flying hours over Asia qualifies as foreign income, but income earned during the remaining 10 hours over the Pacific Ocean does not. This means the pilot is liable for U.S. tax on about 77% of earnings during that flight,” writes Yan.
According to a pilot who was interviewed, he must tediously take notes on all the flights he goes on throughout the year. Additionally, he has no choice but to pay an accountant $1,300 a year to prepare his complicated 60-page tax return.
Many pilots are unaware that they should keep records in the first place. By the time the IRS contacts them, they are in trouble.
“The regulations are so obscure that some tax professionals don’t even know they exist. Even for specialists, there are plenty of gray areas,” writes Yan. “Accountants, for example, say that the U.S. definition of “international waters” is far too vague — and even contradictory.”
It is this obscurity surrounding the tax rule that causes some accountants to deduce “that international waters begin three miles off the coast, while others say the boundary starts 200 miles offshore. The pilots, meanwhile, are expected to keep track of every entry and exit with pinpoint accuracy,” writes Yan.
If you are an American pilot or captain living abroad, the IRS suggests that you use flight or ship plans, and use it to map out geographical points and travel times.
If you or someone you know has tax questions, U.S. Tax Shield has answers. Contact us today to learn more about how you can get protected and resolve your back tax debts with the IRS.